Alimony vs. Property Settlement
Divorcing spouses must clearly distinguish between payments that are part of a property settlement and those that are alimony. A distinction between the two is critical if for no other reason than tax consequences. Alimony payments are different from property distributions, which are generally without tax consequences to either spouse. Failure to properly label alimony can result in drastic tax consequences to the payor.
While the terms and conditions of a property division are negotiated first and set in stone, alimony is often modifiable, and based on changing circumstances, such as changes in employment or retirement. Payments of property division are unaffected by remarriage, whereas alimony often terminates if the recipient makes another trip to the altar. A former wife cohabiting with a new love may drive her former husband to distraction, particularly when he is paying her alimony, but payments in support of a property settlement are a distribution of what they had when they were husband and wife. Alimony continues only during the lives of the spouses; property settlements are inheritable and can be enforced by the decedent's estate.
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TAXABILITY – When it meets IRS guidelines about the terms and conditions of payment, alimony is deductible to the payor and taxable to the recipient. Requirements for this tax treatment include explicitly labeling the payments as spousal support in the divorce decree and requiring the spouses to live apart while receiving support and terminating the payments when the recipient spouse dies.
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